GV Lawyers would like to introduce an article by Lawyer Nguyen Kim Nhu titled: How to evade “the state of being innocent but having evidence against oneself” published on Saigon Economic Times 40-2020 (1,555) dated 017/10/2020.
TRANSPARENCY TO PROTECT SHAREHOLDERS
Modern corporate law is built on the separation of corporate ownership and corporate governance. Shareholders are the owners of the company but do not directly manage the company, but give management rights to professional managers – directors and managers. From here, a risk arises: directors and managers misuse their positions for personal gain or gain for third parties. Profiting and self-interest are often done through contracts between the company and the people involved. Therefore, to protect shareholders, the corporate law provides a mechanism to approve transactions between companies and related people.
According to the Enterprise Law 2020, the scope of stakeholders is very wide, including all individuals and organizations that have direct or indirect relationship with the enterprise such as the parent company and the manager of the parent company; relatives such as wife, husband, natural father, natural mother, adoptive father, adoptive mother, father-in-law, mother-in-law, father-in-law, mother-in-law, natural child, adopted child, son-in-law, daughter-in-law, biological brother, sister, younger brother biological, brother-in-law, brother-in-law, sister-in-law, sister-in-law of a company manager, legal representative, controller, member and shareholder owning the controlling share of capital or shares. . .
The goal of this approval mechanism is to ensure contracts will be fairly signed under normal commercial market conditions. This mechanism firstly protects shareholders and also thereby protects parties with related interests (stakeholders) such as creditors, banks, the State (mainly tax benefits) …
ENTERPRISE LAW 2014: CONTRACT IS STILL IN EFFECT IN VIOLATION OF APPROVAL PROCEDURE
According to the Law on Enterprises 2014, the general meeting of shareholders or the board of directors need to approve the contracts and transactions between the company and the following subjects: (i) Shareholders, authorized representatives of shareholders are groups organizations owning more than 10% of the total common shares of the company and their related persons; (ii) Members of the board of directors, director or general director and their related persons; (iii) Enterprises in which a member of the Board of Directors, controller, director or general director and other managers own capital contributions or shares; enterprises in which their related persons own, jointly own or separately own the contributed capital or shares of more than 10% of the charter capital.
If a contract or transaction with a related person is signed without the approval of the General Meeting of Shareholders or the Board of Directors and causes damage to the company, it will be invalidated. The company and the person involved must then repay each other what it received from the transaction. Regarding personal liability, the contract signer, shareholders, members of the board of directors or the relevant director or general director must jointly compensate for any damage arising, and refund the company of the profits. obtained from such contracts, transactions (Clause 4, Article 162 of LDN 2014). However, according to the Law on Enterprises 2014, a contract with a related party, even if not approved under the company’s regulations, can still be in effect if the contract does not cause damage to the company.
ENTERPRISE LAW 2020: CONTRACT WILL BE VOID IF NOT PERMITTED
In the trend of improving transparency in business operations, the Enterprise Law 2020 has removed the condition that causes damage to the company in the provisions on the effectiveness of transactions with related parties. This means that if a contract or transaction is signed in contravention of the above provisions on approval or approval, such contract or transaction will be considered invalid (Clause 5, Article 167 of the Law on Enterprises). 2020). The approach of the Enterprise Law 2020 is tough and does not accept exceptions. Therefore, even transactions “in good faith” with a related party – that is, transactions under normal commercial conditions and contain no wrong purpose (such as dispersing assets, transferring prices. ) will also be declared void. When the contract is void, the parties will not obtain commercial interests in the contract, even if those benefits are true under commercial conditions in the market, as in transactions with exclusive third parties. create. Furthermore, parties will spend additional time and cost to process those void contracts.
For directors and managers, when a contract they sign is invalid, they will fall into “just the right situation” – that is, transacting for the benefit of the company but forgetting to apply for approval. Agree from the board of directors or the general meeting of shareholders – and shareholders can sue them to claim damages to the company. Then, the company’s manager is personally or jointly liable to compensate for lost benefits, return the benefits received and compensate all damages to the company and the third party. In other words, the provisions of the Enterprise Law 2020 will create an additional burden of responsibility for managers in the process of running the company.
To avoid risks for businesses and managers, enterprises need to establish regulations on contract approval, which clearly list the powers of the parties (general meeting of shareholders, board of directors, directors and other management levels) as well as the process of contract approval with related parties.